E*Trade Struggles, Shares Slip,
But CEO Cotsakos Is in Fat City

By

Susanne CraigStaff Reporter of The Wall Street Journal

Updated May 10, 2002 12:01 am ET

E*Trade
Chairman and Chief Executive Officer Christos Cotsakos Thursday received a Ph.D. in economics from the University of London. Angry investors say he should go back there for a lesson in corporate governance.

Mr. Cotsakos last week became the highest-paid chief executive in the brokerage business, with a pay package valued at about $80 million, including a $15 million loan that has been forgiven, $15 million in company-paid taxes on the loan, $29 million in restricted stock and 1.87 million stock options.

Mr. Cotsakos's pay is just the richest of the many goodies he gets at E*Trade. The online trading and discount brokerage firm also pays for security systems for his house and plane as well as his tuition and flights to London to finish that Ph.D.

According to his employment agreement and recent filings with the Securities and Exchange Commission, the 53-year-old executive stands to make at least $125 million in one-time payments if the firm is sold and he is terminated. He'll also get a retirement package that, under his current deal, will pay him $8.8 million a year.

"It appears to be a runaway gravy train, and you have to wonder who is at the switch," says Brian Foley, an executive-compensation consultant in White Plains, N.Y.

Mr. Cotsakos's current employment contract, which has been sweetened twice in the past three years, expires at the end of this month. He declined repeated requests to comment for this story. But people familiar with the matter say he plans to announce changes in his new contract as early as Friday that will pay him less and take back money he has already been given.

News of Mr. Cotsakos's pay package, reported last week in The Wall Street Journal, helped send the company's stock into a tailspin, with shares dropping in value nearly 30%, to $5 a share. The share price has rebounded slightly in recent days, closing Thursday at $6.12 in 4 p.m. New York Stock Exchange composite trading. It's still way below April 1999, when E*Trade shares traded as high as $70.

In a Slump

The online-trading business has been in a slump for more than a year, as investor appetite for self-directed investing has cooled. E*Trade reported a first-quarter loss of nearly $276 million (which included an accounting-related charge of $299.4 million). In the first quarter of 2001, E*Trade had a net loss of $9.2 million, or three cents a share.

But bad times haven't diminished the perks the company has been handing out, and not just to Mr. Cotsakos. The housing contract of one other executive, Jerry Gramaglia, the former chief customer-operations officer, who rents a multimillion-dollar house from E*Trade, is so detailed that it covers everything from a trash compactor to a garage-door opener and a refrigerator. Len Purkis, the firm's chief financial officer, also got "the benefit received" for a company-purchased gift valued at $29,132 in 2001. The company wouldn't say what the gift to him was and otherwise declined to comment. Mr. Purkis didn't return a call for comment.

"We are not too pleased, as you can imagine," says Bill Fries, a portfolio manager with Thornburg Investment Management, which owns about 2% of E*Trade's stock, making it one of the company's largest shareholders. "When you create an image of wasteful spending and self-aggrandizing, you carry a big sign that says your corporate culture is centered on individuals and not shareholders."

Another shareholder, Thomas Barry, took his beef with E*Trade, of Menlo Park, Calif., a step further and filed a lawsuit in February against the firm in California Superior Court, San Mateo County, for "breach of fiduciary duties, waste of corporate assets, abuse of control, and gross mismanagement." Mr. Barry, who through his lawyer declined to comment, is seeking unspecified damages. E*Trade says the suit is without merit.

Mr. Cotsakos joined E*Trade before it went public in 1996 after holding several executive-level positions at
FedEx Corp.
and market researcher ACNielsen. He is credited with taking E*Trade from $73 million in revenue to $1.28 billion in 2001. His official corporate biography says he is a decorated Vietnam veteran who was awarded a Purple Heart and a Bronze Star. He is heralded by the company in promotional literature as one of the "visionaries, architects, and leading founders" of e-commerce.

Driving Force

Mr. Cotsakos owns almost 5% of the company and has been a driving force behind the push to diversify E*Trade's business beyond online trading into areas such as banking, which today provides nearly 30% of E*Trade's revenue.

The company says some of the items it agreed to pay for, such as the expenses associated with Mr. Cotsakos's Ph.D., actually didn't cost all that much. For instance, tuition came to just $1,400 a year, and he plans to reimburse the company that money with proceeds from the book that will be based on his dissertation, the company says. The firm says he took just 10 trips to London related to his Ph.D., and flew "primarily" on commercial airlines. Most of the trips were in tandem with business meetings. The company wouldn't disclose how much it spent on Mr. Cotsakos's airfare. However, if he flew first class, as his employment agreement permits, a round-trip ticket from New York to London currently costs about $11,549. E*Trade wouldn't release details on his lodging arrangements in London for "security reasons."

Some shareholders and analysts say the company is still operating as if the Internet bubble hadn't burst. Mr. Fries says if Mr. Cotsakos doesn't give back some of his pay, it could affect how he casts his vote for chairman at the firm's annual general meeting on May 24. "They have a limited amount of time to get up front of this issue and address it," he says.

Take Mr. Cotsakos's employment agreement. In addition to paying for costs associated with his Ph.D., E*Trade agreed to pay for first-class airfare for his family if they wanted to accompany him on business trips. The company also agreed to lend its top executive money, at the lowest interest rates available, to purchase from E*Trade any "transportation equipment," an offer compensation experts say could range from a car to a yacht. E*Trade won't comment about that.

In August 2001, the company also canceled a $15 million loan, and it agreed to pay another $15 million in related taxes in exchange for Mr. Cotsakos's agreement to give up certain relocation and change-of-control benefits it says are worth $45 million.

Mr. Cotsakos's biggest payday may still be on the horizon. If the firm is acquired and he should be terminated, he gets severance pay of $44 million, according to his employment agreement and SEC filings. Also, two outstanding loans totaling $26.9 million will be forgiven and the firm will add to the amount he receives to include taxes he might have to pay, which will likely total another $27 million. He also gets a $10 million life-insurance policy and health-care coverage until he dies. And his options and restricted stock, valued at $29 million, will vest and the firm will pay his taxes on both. On top of all that Mr. Cotsakos will get whatever is sitting in his retirement account, currently about $9 million.

In addition to his severance package, he gets $35 million in the event he becomes disabled; his estate gets $35 million, plus another $10 million if he dies. In both cases, he or his estate gets stock options, restricted stock and his retirement benefits.

'Extraordinary' Contract

"The entire contract is so lush I can only assume the board was just rubber-stamping everything. It is truly an extraordinary employment contract," says Judith Fischer, managing director of Executive Compensation Advisory Services, a compensation consultant in Alexandria, Va.

In addition to the perks given to Mr. Cotsakos, E*Trade lost almost $3.9 million in 2001 alone just selling two houses once occupied by its executives and expects to lose another $1 million on two other company owned houses. Total rent collected? Just $204,000 since 2000. The firm's former president, Mr. Gramaglia, who still lives in one of these houses, pays $8,250 a month in rent, and other executives pay similar amounts. The firm's executive real-estate program has been shut down because the housing market in Silicon Valley has cooled substantially in recent months.

The board's compensation committee is chaired by David Hayden, executive chairman of struggling Internet-software company
Critical Path Inc.,
a firm in which E*Trade has a nominal investment and of which it is a customer. E*Trade buys electronic-notification systems, such as price-stock alerts, from Critical Path. Mr. Hayden, a director since August 2000, declined repeated requests for comment. Mr. Cotsakos served on Critical Path's board until late 2000. William E. Ford, also a director of Critical Path, is on E*Trade's compensation committee. He didn't return a call for comment.

E*Trade directors recently voted to give themselves a raise. The annual fee paid to each E*Trade director jumped at the beginning of this year 150%, to $25,000, and the sum paid for showing up at a meeting rose 66%, to $2,500. In addition, a new spot on the board was created for "lead director," a position that pays $40,000 a year.

"Some of those numbers are certainly higher than the industry norm," says Ms. Fischer. "Clearly everyone is in on the act."

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